Imperial Fire Ins. Co. of London v. Home Ins. Co. of New Orleans

McCORMICK, Circuit Judge. These cases will be considered together in this opinion. The appellants, the Royal Insurance Company of Liverpool and the Imperial Fire Insurance Company of London, will be referred to, respectively, as the Royal and the Imperial, and the Home Insurance Company of New Orleans, the appel-lee in-each case, will be referred to as the appellee. — 699 — In November and December, 1891, the appellee applied to the appellants for reinsurance, and duly received the respective policies which are the subjects of this litigation. The ajipli cations to (he Boyal were made on printed forms, with certain blanks filled in writing. ' The application to the Imperial does not appear to have been in writing, but was substantially to the same effect as those made to tlie Boyal, the features of which material to note here were and are (hat the applicant warranted to retain $25,000, and described the property applicant had insured as “cotton subject to coinsurance clause.” The Boyal has now abandoned any contention on the re-ten (ion clause. The Imperial still insists on its construction of that clause, but the proof abundantly supports the action of the circuit court on the issues made on the warranty by the Home to retain 825,000 or more on the risk. During the life of these policies of coinsurance, a large amount of the cotton was destroyed by fire. At the time of (he fire, the appellee had written and in force, on the cotton subject to the fire, policies with the coinsurance clause to the amount of $97,700, and policies without the coinsurance clause to the amount of $25,000. The loss on the cotton covered by the first-named class of these policies was $38,707.58, and the loss on the other exceeded tlie amount of the policies. There is substantially no issue as to what were the actual facts as to the contracts and the loss; and there can be no dispute that, if tlie contention of the ap-pellee as to (he construction of the contract of coinsurance is correct, the decree of the circuit court should be affirmed. Having found that its construction of the retention clause is correct, it only remains to consider the other clauses of the policies on which issue is joined. The judgment and decree of the circuit court construe these clauses in favor of the appellee, and a majority of the judges of this court concur in that conclusion. The questions here involved are so well stated, aud the authorities, so far as any authority exists bearing on the question, are so soundly applied, and the argument so full, fair, and well expressed in the brief of counsel for the appellee, that, in justice to ourselves and to him, we must adopt and use his reasoning almost literally, and to substantially the full extent that he has advanced it, there being left little or nothing to add to or qualify what he has said : It is urged Hint tlie defendants are not liable for tlie losses paid by tlie plaintiff to Frankonbusli and Borland, because the policies issued to theni did not contain the coinsurance clause. It is urged that the two slips pasted on the policies of reinsurance are descriptive of the risk assumed by the re-insurer. The defendants are driven to take this ground because the reinsurer has insured the liability of the original insurer, whatever that he, unless in the contract of reinsurance there can be found some clause whereby the reinsurer stipulated that it assumed no risk, unless the original insurance contract contained tlie co-insurance clause. It is observed that the policies of reinsurance bear the following dates: That of-the Imperial is dated November 23, 1891, and those of the Boyal dated November 12. 1891, and December 26, 1891. The Frankonbusli and Borland policies are dated: October 12. 1891; November 19, 1891; February 9, 1892; February 11, 1892; February 26, 1892. Only one of the policies is dated before those of the Royal, and only two are dated before that of the Imperial. Three of them are dated after all of the policies of reinsurance were issued. The deseriplion of the risk in the reinsurance policies is that the Home Insurance Company are insured on $10.000 of their liability as insurers under tlieir various policies, issued to various parties, for various — 700 — amounts, and covering as follows: Ten thousand dollars on cotton in bales their own or held by them in trust or on commission while contained in the yard No. 1, Shippers’ Press, New Orleans, La. A part of this description is clearly inapplicable to the reinsurance, for the words “their own or held in trust or on commission” have no meaning as between the insurer and the re-insurer. The cotton itself was not the subject of insurance as between the insurer and reinsurer, but as between them the subject of insurance was the liability of the insurer, as an insurer, on cotton in yard No. 1, Shippers’ Press, owned or held in trust by the original insured. Now, this policy was issued to last for a year, and was intended to cover any liability that, the insurer during the year might assume as insurer of cotton in the designated press. It was not restricted to liability then existing, but extended to future liability which might be incurred by the Home Insurance Company on cotton in the Shippers’ Press, yard 1. What was the stipulation as to the risk assumed by the reinsurer? He agreed to cover any risk which the insurer might be willing to take, for that is the meaning of the words, “This policy to be subject to the same risks, conditions, valuations, indorsements, and modes of settlement as are or may be assumed and adopted by the reinsured, and the loss, if any, payable pro rata at the same time and in the same manner as by said company,” etc. Any printed stipulation having reference to the property itself, or the cash value thereof, cannot be applied to the contract of reinsurance between the reinsurer and the reinsured, because the property is not the subject-matter of their contract. It is true that the contract of reinsurance must apply to the subject-matter of insurance specified in the original policy; that is to say, to cotton in Shippers’ Press, yard 1, and to risks of the same kind as those specified in the original policy. In other words, if the original policy is a contract of. insurance against loss by fire, the reinsurance must be against loss by fire, and not against loss by tempests or storms on land or at sea. But the specific risk'in the policy of reinsurance need not be identical with that in the original policy; that is to say, an. original insurance may be effected on a vessel for six months, with úse of all of the ports of the world except those of Texas. The reinsurance may be for a single voyage within the bounds not prohibited, and for a less amount. This was decided in the case of Philadelphia Ins. Co. v. Washington Ins. Co., 23 Pa. St. 250. Such is the law in the absence of stipulations contained in the lower printed slip annexed to the policies sued on. That slip provides that this policyis to be subject to the'same risks, conditions, and valuations, indorsements, etc., that are or may be assumed or accepted by the original insurer. I-Ience reinsurance under these policies is reinsurance against any of the fire risks assumed by the original insurer, in any of its policies on cotton in Shipper’s Press, yard 1, and on the same conditions as those contained in any of the original policies issued by the original insurer, to the original assured, on cotton thus located. This clause gives to the original insurer the privilege of taking such risks on cotton in the designated place as it may choose. The reinsurer says: “I will reinsure -whatever contract you make, and, to protect me from any imprudence on your part, you must retain ait least $25,000 on the same risk.” This is the view taken of this clause by the supreme court of Massachusetts in Manufacturers’ Fire & Marine Ins. Co. v. Western Assur. Co., 145 Mass. 424, 14 N. E. 632. The court said: “It is often doubtful how far provisions which relate to the conduct of an assured person, as general owner of that which is the subject of the contract shall be given effect in a policy to indemnify against a risk which the assured has taken upon the property of another. * * * The nature of the risk against which it insured, if there was no special stipulation pertaining to it, would suggest troublesome questions with reference to the applicability of these provisions of this peculiar kind of insurance, some of which it might be necessary to decide.” But, in connection with the statement of the risk, the following sentence was inserted, which relieves the court of this difficulty: “This policy to be subject to the same risks, conditions, valuations,” etc., “as are or may be assumed or accepted by the insured company,” etc. The language of the clause is almost identical with the language used in the lower slip or rider attached to the policies sued on in these cases. The court said: “By this language the defendant bound itself by what had been done, and by what might be assumed and adopted by the plaintiff, properly pertaining to the risk which — 701 — it was reinsuring. This agreement rendered nugatory many printed portions of tlie policy in which it was inserted. This was special and peculiar, peri ant-ing directly to the subject-matter of the contract, and it controlled those parts of the policy' which were inconsistent with it. It assumed knowledge on tlie part of the defendant of all the terms and conditions of The plaintiff’s policy, and it implied that the plaintiff, as original insurer, might properly assume or adopt risks, conditions, etc., without materially changing the nature of the liability created by ihe original policy.” This was a case of reinsurance of a fire risk on a particular factory, which liad been assumed by the reinsured company, and the number of the policy designating tlie risk was inserted in The contract of reinsurance. The court of appeals of New York, in the case of Jackson v. Insurance Co., 99 N. Y. 129, 1 N. E. 539, confirms tlie doctrine of the Massachusetts court. Justice Danforth says: “Tlie reinsurer had no property right in the subject insured by them, but, by underwriting the policy, rendered themselves liable to loss from fire, and they thereby acquired an insurable interest to the extent of that liability. But it was in relation to the peril only against which they had insured. It is that to which their request for reinsurance applied. B.v it they in effect say, as insurers: ‘We have undertaken to carry a risk which as taken by us is as follows: It amounts to $4,500, and we ask indemnity against a portion of it.’ It is not pretended that they did not state tlie risk literally as they had taken it, and it was in fact described in their policy in terms similar to those used in the policy of reinsurance. The case may, indeed, be taken in like manner as if they had exhibited to tlie defendants the original policy, and the defendants had indorsed upon it an assumption of the risk of 81,500.” In both of these cases the reinsurance applied to a specific original policy of insurance, designated by uum ber in tlie contract of reinsurance. In those cases the original contract of insurance had been made before tlie reinsurance contract. In this case most of the original insurance was subsequent to the contract of reinsurance, and none of the policies of insurance originally issued, prior to the contract of reinsurance, are designated by numbers or otherwise. The original policies of insurance are not only not described in the contract of reinsurance, but the contract covers a period of one year, and it contemplated subsequent insurance. It also contemplated that existing policies might expire, and new policies be made. Oilier insurance was permitted by the reinsurer. IIow was it possible to describe these future contracts of insurance, intended to be covered by the reinsurance? They could not be described except as to the species of property, and the locality thereof, and therefore tlie reinsurer said to the reinsured: “Wo will protect you against any loss on cotton in Shipper’s Press, yard 1. which you may assume as insurer; and we agree to accept the terms and conditions you may make with your customers, but you must not throw tlie entire risk on us. Although we permit you to make other reinsurance, yet you must retain, as insurer, a liability of a,t least $25,000 on ihe risk which we take; and, in case of loss, we fix the proportions in which we are to make payment. Dor that purpose, we put in the following-stipulation: ‘This policy to be subject to the same risks,’ etc., ‘as are or may be assumed by the reinsured company, and the loss, if any, payable pro rata at the same time and in the same manner as by said company,’ ” etc. Tlie court of appeals of New York, in Blackstone v. Insurance Co., 56 N. Y. 107, say that, “by virtue of this clause, the defendant is not bound -to pay ihe full amount reinsured by its policy, but only such proportion of llie amount of the loss as is in the ratio of tlie amount of reinsurance to tlie amount originally insured. Thus, tlie defendant’s reinsurance being for half of’the, amount of the original insurance, the defendant is to pay half of the loss.” The agreement to pay pro rata with the original insurer whatever liability may be assumed is entirely inconsistent with ihe clause providing for a different basis of liability, and it has no application "> reinsurance, which does not cover property, but covers only 1he insurable interest of the reinsured, growing out of his liability as Insurer. In tlie Massachusetts case (145 Mass. 424. 44 N. E. 632) it was held that die clause requiring the written consent of the company to a change in the title or possession of the property insured had no application to a reinsurer, and no notice of such change need be given to him. It sufficed if such change was assented To by the original insurer, in Usielli v. Insurance Co., 15 Q. B. Div. 13, it was held that the reinsurer was not on702 titled to notice of abandonment, though the primitive insured may have abandoned to his insurer. The court quote Phillips on Insurance and Hastie v. De Peyster, 3 Caines, 196. In that case Chief Justice Kent says: “The reinsurer has no connection or concern with the first insurance, and is at all times bound to indemnify his own assured when the other can show that he has been damni-fied in consequence of the first insurance.” Mr. Justice Livingston says there was no privity at all between the primitive assured and the reinsurer. In the-Uzielli Case, just referred to, it was held that the suing and laboring clause in an original insurance policy and in the policy of reinsurance has no application to Reinsurers. That, clause provides that, in case of loss or misfortune, it shall be lawful for the assured, his agents, factors, etc., to sue, labor, and travel in and about the safeguard, defense, and recovery of the goods, etc., and the ship, without prejudice to this insurance, to the charges whereof the insurers agree to contribute. In that case the reinsurance was for £1,000, but the loss, as between the insurer and the assured, was 112 per cent., because the loss was 88 per cent., and the expenses incurred, when added to the loss, made the original insurer responsible for 112 per cent., that is to say, 88 per cent, of the sum underwritten, plus the expenses. The court said: “The plaintiffs seek to recover 88 per cent., which the French company have paid for a total loss, and they seek to recover more under the suing and laboring clause in the policy. Now, in the policy sued on, the ship, as between the plaintiffs and the defendants, is insured at £1,000. The policy itself is declared to be a reinsurance, and also it contains the suing and laboring clause. If it were not for the clause whereby the defendants were rendered subject to the same terms, clauses, and conditions as were contained in the original policy, and were to pay as might be paid thereon, the plaintiffs, in my .opinion, would be entitled to recover only 88 per cent, etc. * * * The plaintiffs rely, however, upon the special clause, whereby the defendants have undertaken to pay as the French company shall have paid; and under this clause they are entitled to recover any sum not exceeding £1,000.” The special clause referred to is, in the main, similar to that contained in the lower slip of the policies sued. on. The defendants in this English case were reinsurers of the French company, which itself was a reinsurer of English underwriters. In this case it will be observed that, though the suing and laboring clause was a part of the policy of reinsurance, the court held it had no application to the reinsurers. Why? For no other reason than that the reinsurer does not insure the owner of the ship, but the insurable interest of the insurer. Hence that interest is the loss that the insurer might suffer under the policy issued by him, and the master of the rolls said the suing and laboring in that case for the safeguard of the ship was not by the assured under the policy of reinsurance, but by the assured un'der the original policy, for the ship was not insured under the reinsurance policy. So totally distinct is the original insurance from the reinsurance that the premium of reinsurance may be less or greater than that of the original insurance, as well as the extent of the risk. The most instructive case on the subject is the most recent, — Faneuil Hall Ins. Co. v. Liverpool & L. & G. Ins. Co., 153 Mass. 70, 26 N. E. 244. The reinsurance policy in that case contained a clause similar to that in the lower slip attached to the policies sued on, to wit: “This policy is subject to the same risks, conditions, mode of settlement, and, in ease of loss, payable at the same time 'and in the same manner, as the policies reinsured.” The court said that many of the provisions in the printed blank would be inapplicable, and quotes,one provision at the very commencement of the blank, viz.: “This company shall not be liable beyond the actual value of the insured property at the time any loss or damage happens.” This, said the court, does not measure the defendant’s liability under the contract of indemnity. Under that, it may be liable, not only for the amount of the original loss, but for the costs and expenses incurred by the German-American Company, in defending itself ^against Chauncy’s suit Again, in speaking of the provision quoted above, the court says: “We think this provision means, not that the various terms in the reinsured policy as to the risk, conditions, mode of settlement, and time, and manner of payment in case of loss are incorporated with and form part of the contract for indemnity, — so that, for instance, claims by the plaintiff upon the deféndant shall be settled by arbitration, or the plaintiff shall submit its books to the inspection of the defendant, or shall bring suit within one year, — but — 703 — that the reinsured or original policies furnish in tliese and oilier particulars the basis upon which the contract of indemnity stands, and that in all dealings with the original insured the provisions of the policy issued to him are to he observed.” The object of the coinsurance clause is to make the owner of the property carry a part of the risk, unless he insures to the full value of his property. The purpose is to compel the owner of property to take out policies to the full value of his property, and pay premiums on such full value; whereas the retention clause in policies of reinsurance is intended to discourage ami prevent, full reinsurance, and is, in fact, a coinsurance clause as between the reassured and his reinsurer; for the retention clause is a contract between the insurer and his reinsurer that the original insurer will not effect reinsurance to the extent of his entire liability, but will carry himself a part of that liability, and the part to be carried was iixed in this case at not Jess than $25,000. Hence the retention clause--the coinsurance clause as between the reassured and the reinsurer — is intended to accomplish an object totally different from the object intended to be secured by the coinsurance clause in tlie primitive policy issued to the assured. It is therefore plain that tlie clause in the upper slip or" rider attached to the policies of reinsurance has no application whatever to reinsurance. That clause provides “that This company shall be liable for only sucli proportion of the whole loss as the sum hereby insured bears to file cash value of the properly hereby insured.” No property whatever is insured by tlie reinsurer. His policy applies to a liability of the original insurer, arising out of his insurance of the property, and this liability is the incorporeal subject-matter of ihe reinsurance contract, and is collateral to the property. If the above-quoted clause were applicable to reinsurance, the liability of the Imperial Company on its policy for S10,000 would be only SHÍili.Híi, or one-twelfth thereof, inasmuch as the amount insured ($10,000) is one-twelfili of $120,000, which sum, for tlie purpose of illustration, is assumed to be tlie total value of tlie cotton insured. This result is almost absurd in the face of an agreement contained in tlie policy of reinsurance that “this company' will be liable in case of reinsurance for the loss sustained only in the proportion which the sum reinsured shall bear to the whole sum covered by tlie reinsured company.” Besides, there is an express pro rata clause in the lower slip attached to tlie policy' which provides for pro'rata payments to be made by the reinsurer, at the same time and in the same maimer as by the Home Company. It is apparent that, in case of reinsurance, the value of the property' is abandoned as a test of proportionate liability'. ’ and in place thereof is substituted tire proportion which exists between the amount of insurance carried by tlie reinsurer and the total amount of insurance carried by the primitive insurer. This is necessarily the case, as the property' is not insured by the reinsurer; the liability of the primitive insurer, in respect of Hie property', being ihe subject-matter of tlie reinsurance contract. The coinsurance clause cannot be said to be descriptive of tlie risk as between the reassured and tlie reinsurer, because the risk which the re-insurer takes is tlie risk described in the original polity', whatever that maybe, unless some clause can be found in the reinsurance contract which expressly varies that description. We find no clause in the reinsurance policies which varies or modifies the risk as assumed by the original insurer. The complaint -is not that any' clause in tlie reinsurance policy lias been violated by the Home Company, but that the Home Company did not insert the coinsurance clause in its contract with the primitive assured. This reduces the case to one of misrepresentation or concealment. No averment in the answers is made on which such a defense can be based. Indeed, such a defense is inconsistent with tlie answers, which assert that the coinsurance danse is contained in the policies sued on, and treat as such that pan of the policy which declares that the insurer shall be liable for only such proportion of the whole loss as the sum insured bears to tlie cash value of the whole property at the time of the fire. The answers insist that all the terms of the contract between the parties are to be found in the policies of reinsurance. We need not. therefore, go beyond these policies to determine the rights of ihe parties, and hence no case of concealment or misrepresentation is presented by the pleadings. The defendants claim that the clause just quoted is the coinsurance clause, and that their liability is for only' “such proportion of the whole loss as the — 704 — sum insured bears to the cash value of the whole properly Insured.” It appears tó us that this clause has no application to reinsurance, and is inconsistent with the pro rata clause, which provides that the reinsurance is subject to the risk specified in the original policy, and that the reinsurer is to. pay the loss pro rata with the reinsured. It is urged that one of the applications for reinsurance expressly asks for reinsurance subject to coinsurance, and appellants insist that this is not only a material but the most material of the descriptions of the risk, “because, at tRe time when the contracts of reinsurance in this cause were entered into, the market rate charged in the city of New Orleans upon policies on cotton, and containing the coinsurance clause, was one per cent.', whilst policies not containing such a clause upon the same product commanded a premium of one and one-half per cent. In other words, it cost fifty per cent, more to obtain insurance without the coinsurance clause than with it.” Let us see. Frankenbush and Borland had, to use round numbers, $60,000 worth of cotton. They lost, still using round numbers, §30,000 worth of their cotton. On this they had $25,000 of insurance without the coinsurance clause, for which they paid 13¡ per cent, premium, amounting to $375, and got $25,000 on their policies. Now, with that amount of property and that amount of loss, how much coinsurance must they have had to get $25,000 indemnity? The indemnity received was five-sixths of the loss. To have received a like amount under coinsurance policies, they must have had policies written nominally for five-sixths of the value of the property insured; that is to say, to the amount of $50,000, which at 1 per cent, on the amount nominally written would have cost them $500 instead of $375. This is basing our calculation on the facts of this case. The proof shows that Mr. Borland is a director in the Home Company. It also shows that he would not accept coinsurance policies on his cotton at risk. It shows that another firm of cotton factors, who took more insurance in the Home on cotton than all other persons combined, would not take coinsurance policies. It is not contended or suggested that they are not as binding according to their terms as other policies, or that they present any difficulty in the matter of adjustment. We incline to think that those who preferred policies without the coinsurance clause were justified in resting their choice od the knowledge they had that such insurance was the cheapest. Therefore, in addition to the reasoning of Mr. Semmes, which we have above adopted, we suggest that, considered as a representation, the materiality of the words “subject to coinsurance” is not made to appear by the proposition we have quoted from the brief of appellants’ counsel, which is the proof text of their discourse. It seems to be clear that the purpose of the coinsurance clause is to stimulate full insurance. This being the chief object, insurance companies can hardly claim that it operates to lessen the moral hazard. It manifestly cannot afiiect the physical hazard. The fact that some of the appellee’s policies did not have the coinsurance clause cannot therefore be relied on as a concealment, though “all the authorities, concerning matters of insurance, concur in the position that, if the concealment is material, it will avoid the policy,. notwithstanding the assured did not in — 705 — tend to commit any fraud. The suppressio veri may happen hy mistake, and he entirely without fraudulent intention; still the underwriter is deceived, and the policy is thus void, for the very plain reason that the risk run is really different from the risk understood and- intended to he run at the time of the agreement. A concealment which is only the effect of accident, inadvertence, or mistake. is equally fatal to the contract as if it were designed. The principle is that if the party proposing insurance conceals anything which may influénee the rate of premium which the underwriter may require, although he does not know that it would have that effect, such concealment entirely vitiates the policy. JBy a material fact is meant one which, if communicated to the underwriter, would induce him either to decline the insurance altogether, or not to accept it unless at a high premium.” Ang. Ins. § 175. Within the meaning of the authorities, it was not material,’ even if it can have relation to the contracts of reinsurance herein involved. The decree of the circuit court in each case is affirmed.